Corporate Solutions

Property News - Break Clause Oversight

Tenants have been warned to double check the small print on break clauses in their leases following a court case which has left a firm up to £300,000 out of pocket.

Commercial property experts at Colliers International highlighted the case after a judge at the High Court in Bristol ruled in favour of a landlord who had challenged a tenant’s right to invoke their break clause.

Colliers International Corporate Solutions Director Mike Woodliffe said: “This case highlights the pitfalls involved in a tenant serving a break notice and the conditions that must be met.

“The fact that the entire case hung on an outstanding sum of less than £200 has serious implications for landlord and tenant alike and proves once again the importance of proper consideration of what might be termed the small print in all commercial leases.”

The case involved a firm based on an estate in Stroud which had attempted to serve a break notice on its landlord. The landlord contested the break clause claiming it was invalid. The judge ruled in favour of the landlord and held that the tenant could not operate the break because a small sum of rent had not been paid despite the fact it never having been invoiced. The amount was interest on late payment of rent at some point during the lease term.

It was only after the break date that the landlord claimed for interest that should have been paid and the judge ruled that the tenant should have known this sum was due.

Mr Woodliffe continued: “The result means that the tenant continues to be liable for rent and other costs for the next five years, a total expenditure well in excess of £300,000.

“Whilst the judgement may seem harsh it highlighted the need for careful analysis of a tenant’s lease to ensure that specific terms and conditions are complied with. This includes payment of rent and numerous other requirements such as repair and decoration. Tenants may assume that because they have a break option in their lease they can just walk away at the relevant date.

“Our experience is that instances such as these need to be given careful consideration and planned for accordingly. People often assume they know what they are doing and do not take specialist advice due to the perceived high cost.

“In the present economic climate with low demand and onerous liabilities on the owners of vacant properties, landlords will carefully scrutinise the validity of the tenants’ break notice in order to avoid losing a tenant.

“Businesses are feeling pressure on all fronts and decisions to close shops or commercial units are not taken lightly - but failure to review the break option in the lease may lead to misinformed decisions that may have cost implications or in the worst case may mean the lease is not terminated and the liability remains for the remainder of the lease.

“This case highlights the need for careful planning prior to the service of a break option and the importance of taking specialist advice to ensure compliance.”